4.3.3 Strategies influencing growth and development

MARKET-ORIENTATED STRATEGIES

1. trade liberalisation

2. promotion of FDI

3. removal of government subsidies

4. floating exchange rate systems

5. microfinance schemes

6. privatisation

1. IMPACTS OF TRADE LIBERALISATION

• reduce in trade barriers (e.g. tariffs,quotas) → increases competition → firms incentivised to reduce costs/improve efficiency to be able to lower prices (easier for those in developing countries as they usually have lower labour costs) → increases demand for their goods → increases export-led growth

• also allows resources to be allocated to where country has comparative advantage- can specialise in this

2. POS IMPACTS OF PROMOTION OF FDI

• gov can incentivise FDI by reducing regulations, taxation and/or min wage

• increases job opportunities as they open business in these countries so helps fill savings gap → pos multiplier effect

• involves transfer of knowledge → company can bring production and management techniques and train workers

2. EVAL OF POS IMPACTS OF PROMOTION OF FDI

• if they reduce taxes to promote → less tax revenue

• environmental damage and exploitation of natural resources

• if they reduce min wage → lower incomes + usually poorer conditions → less consumption → lower living standards

3. POS IMPACTS OF REMOVAL OF GOVERNMENT SUBSIDIES + EVAL

• often poorly targeted since subsidies on basic goods like rice will benefit everyone, and not just poor- better to give cash payments to poor as its better targeted

• often lead to inefficient firms- firms may become subsidy dependant so wont attempt to lower AC→ can limit development

• opportunity cost removed- couldve led to high levels of debt if gov funded by borrowing

• EVAL- but removing it is politically unpopular (e.g. shown in Egypt)

4. POS IMPACT OF FLOATING EXCHANGE RATE SYSTEMS + EVAL

• countrys exchange rate would be determine by demand and supply → gov dont have to worry ab gold and foreign currency reserves as they dont intervene

• EVAL- currency can be volatile → makes it difficult for exporters/importers to make decisions about future → uncertainty → deter FDI

5. POS IMPACTS OF MICROFINANCE

• aim to give poor households permanent access to a range of financial services, including loans, savings and insurance

• allows borrowers to invest in businesses or start up new ones

• scheme tends to target groups who would be less likely to otherwise receive loans, e.g. women

5. EVAL OF POS IMPACTS OF MICROFINANCE

• this happened in south africa

• became method of financing consumption spending → unemployed didnt have funds to ensure repayment of their loan → had to take out new loans or sell assets → can build up debt

• when used for investment → increased informal economy with very little being spent on sustainable methods of development

6. POS IMPACTS OF PRIVATISATION + EVAL

• can end corruption within a firm who is owned by state

• can encourage firm to be more efficient due to increased competition → lower prices

• selling off a firm, particularly if it is loss making, will improve gov finances and reduce debt

• EVAL- if firm privatised as a monopoly there will be no competition within the market.

INTERVENTIONIST STRATEGIES

1. development of human capital

2. protectionism

3. managed exchange rates

4. infrastructure development

5. promoting joint ventures with global companies

6. buffer stock schemes

1. POS IMPACTS OF DEVELOPMENT OF HUMAN CAPITAL

• would provide workers with skills and training → improve efficiency and productivity

• human capital could be developed through schools or vocational training, e.g apprenticeships

• higher skills would allow country to develop from primary sector to a manufacturing sector, overcoming primary product dependency

• better education also improves living standards

• EVAL- opportunity cost + time lag

2. POS IMPACTS OF PROTECTIONISM + EVAL

• allows domestic industries to grow by keeping foreign goods out and protects them from strong competition

• can use a policy of import substitution, where they deliberately attempt to replace imported goods with domestically produced goods by adopting protectionist measures

• create jobs in SR

• EVAL- means countries lose out from the benefits of comparative advantage and could cause inefficiency, since domestic producers suffer from a lack of competition + others may retaliate

3. POS IMPACTS OF MANAGED EXCHANGE RATES + EVAL

• could be fixed against diff exchange rates

• -high exchange rate for essential products makes it cheaper, which helps to reduce poverty if goods are consumer goods and encourages investment if they are capital goods

• -lower exchange rate for other imports makes it more expensive, discouraging their import and encouraging consumers to buy from domestic producers

• EVAL- often fail to work in practice; black markets in foreign exchange develop which can destabilise system

• or gov can manage a single exchange rate which will reduce volatility, but speculation may mean that countries find it difficult to maintain an exchange rate over a number of years

4. POS IMPACTS OF INFRASTRUCTURE DEVELOPMENT + EVAL

• improved transport- makes transporting goods more efficient → explain → econ growth

• improved water system- reduce water borne diseases → improve living standards

• improved hospital and schools- increase human capital

• EVAL- opportunity cost + time lag + neg externatilies

5. POS IMPACTS OF PROMOTING JOINT VENTURES WITH GLOBAL COMPANIES

• one way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture

• will help to keep some of the profits generated w/in country, which can be used in investment

6. POS IMPACTS OF BUFFER STOCK SCHEMES

• where gov imposes both a max and min price for goods, buying up stocks when excess supply and selling them when excess demand

• self-financing: money is raised when selling products, which allows the gov to buy the next lot of stocks

• used on commodities, where prices are volatile → stabilises prices → encourages investment

• prevents sharp falls in prices, so producers prevented from shutting down, and sharp rises in prices, so consumers can afford it

6. EVAL OF POS IMPACTS OF BUFFER STOCK SCHEMES

• requires stocks to go up and down; if they keep rising, then scheme will run out of money and if they keep falling, scheme will run out of stocks

• require huge start-up costs and problems of storage

• min prices may be set too high→ encourages producers to become inefficient → will produce a lot as they know they will be able to sell it anyway → so high excess supply → gov has to continually buy up the stocks

OTHER STRATEGIES

1. industrialisation: the Lewis model

2. development of tourism

3. development of primary industries

4. fairtrade schemes

5. aid

6. debt relief

1. POS IMPACTS OF INDUSTRIALISATION: THE LEWIS MODEL

• Lewis model assumed that developing countries had dual economies with a traditional agricultural sector, which had low wages, low productivity, underemployment and low savings, and modern industrial sector, w/ high investment

• argues that there is surplus of labour in rural areas, which meant that the labour had zero marginal product due to diminishing returns in primary sector

• this labour would be attracted to the industrial sector due to higher wages → increases productivity → higher profits → higher investment → econ growth

1. EVAL OF POS IMPACTS OF INDUSTRIALISATION

• surplus labour in urban areas- lack of jobs in urban areas which would lead to urban poverty replacing rural poverty + improvements in tech would decrease demand for labour

• neglect of agriculture- although labour productivity is low for some parts of the yr, during planting and harvesting lots of labour is needed

• businesses may not re-invest higher profits + those with higher wages may not save more → less in banks → less to borrow

2. POS IMPACTS OF DEVELOPMENT OF TOURISM

• tourism is income elastic- as global economy grows → demand for industry → increase AD → econ growth

• tourists represent a source of foreign currency, which will fill currency gap. so countries will be able to fund their imports without negative consequences

• countries are likely to attract investment from transnational hotel companies (also transfer knowledge) → can help to fund improvements in infrastructure so gov have an incentive to invest (have pos multiplier effect)

• jobs creation- since tourism industry relies on low skilled workers who know the local area

• higher tax revenues- higher income and higher profits (increase spending to diversify)

2. EVAL OF POS IMPACTS OF DEVELOPMENT OF TOURISM

• seasonal and involves low skilled, low paid jobs→ some areas will see a loss of employment and that investment may only receive a short-term return during off-peak→ so effect of the multiplier is limited

• large amount of wealth will be withdrawn as TNCs repatriate their profits, causing problems involving capital flight

• externalities- due to increased no. of people and businesses → pollution + env damage

3. POS IMPACTS OF DEVELOPMENT OF PRIMARY INDUSTRIES

• some countries, like Saudi Arabia, were able to develop because of an abundance in natural resources

• development of a primary industry provides funds to allow a country to diversify → allowing infrastructure development and better education

• has been significant FDI in commodity mining (China in Africa)

3. EVAL OF POS IMPACTS OF DEVELOPMENT OF PRIMARY INDUSTRIES

• primary product dependency- has volatile prices (explain using other fcs)

• dutch disease

• low value added- start of production process so has the lowest compared to other sectors

4. FAIRTRADE- DEFINITION

• social movement whose goal is to help producers in developing countries achieve better trading conditions and promote sustainable farming

4. POS IMPACTS OF FAIRTRADE SCHEMES

• fair price- agreements made to buy a guaranteed amount of produce over a period of time at a price which is above market price when the agreement was made → gives producers stability and raises their income

• production is sustainable- minimise env damage

• Sri Lanka study- showed those under fair trade had higher income and satisfaction → able to save for the future and invest or provide financial support for family

4. EVAL OF POS IMPACTS OF FAIRTRADE SCHEMES

• not all farmers will qualify for scheme- decreases demand for their good→ lower profits→ causes division in communities

• reduces incentive to diversify and keeps farmers engaged in low profit activities

5. DEFINITION OF AID + TYPES OF AID

• when a country voluntarily transfers resources to another or gives loans on concessionary terms

• tied aid- aid with conditions attached, such as economic or political reforms or a commitment to buy goods from donor country

• bilateral aid- directly from one country to another

• multilateral aid- when countries give aid to an international organisation who distributes it to other countries

• concessional loans- loans given on lower, or no, interest rates

5. POS IMPACTS OF AID

• reduce absolute poverty- especially after disasters/wars

• fill savings gap, as outlined by Harrod-Domar → provides funds for investment, whether this be in infrastructure or in human capital

• provides foreign exchange to fill foreign currency gap

• can contribute to increased globalisation + reduce world inequality

5. EVAL OF POS IMPACTS OF AID

• dependency on aid- countries become over-reliant rather than developing strategies to raise their own tax revenue to fund development

• corruption- money does not always go to where it is meant to

• neg issues in LR due to concessional loans- still have to be repaid→ may limit where the money is spent; countries may only spend money on things they know will see a return in SR

• difficult to know the best way to develop a country and therefore it is difficult to know how to effectively spend aid

6. POS IMPACTS OF DEBT RELIEF

• many countries suffer greatly from high interest repayments to loans they have taken out → opportunity cost of repaying → limits econ growth

• debt relief allows more money to be spent on provision of services and infrastructure to aid development

6. EVAL OF POS IMPACTS OF DEBT RELIEF

• moral hazard- bc it creates a precedent: every poor country may now expect to receive debt relief

• eases pressure on corrupt govs- may spend the tax revenue they have for their own benefit

• developed countries see a loss

INTERNATIONAL INSTITUTIONS AND NON-GOVERNMENT ORGANISATIONS

• world bank

• international monetary fund (IMF)

• NGOs

ROLE OF WORLD BANK

• initially its focus was reconstruction after WWII but now on long term growth and development for LEDCs

• provides finance for internal investment projects (e.g. electricity and water delivery)

• loans from world bank can be below market IR if they are to LEDCs

ROLE OF IMF

• initially its role was to promote exchange rate stability so they can promote international trade

• but now provide finance to solve short-term balance of payments and financial crises, collect data and provide policy advice to raise living standards

EVAL OF INTERNATIONAL INSTITUTIONS

• IMF and World Bank also implemented structural adjustment policies (liberalisation, privatisation, fiscal austerity)- but cuts to gov spending can decrease AD and damage living standards + free trade can damage domestic businesses as imports would increase + privatisation can lead to monopolies being created

• IMF has received criticism for its macroeconomic reforms- involves reducing M and increasing X which reduces amount of resources available for consumption

ROLE OF NGOS

• non-profit organisations that are run independently from gov

• provide direct assistance to countries in form of project work- range from education to healthcare and can either be emergency or long term

• an act as pressure groups to lobby govs to adopt more pro-development strategies

EVAL OF NGOS

• small scale- low impact on a national level as they target specific areas

• harder to regulate- especially if they lack transparency and accountability

• issues with funding- bc non profit, they get their funds from donations so if this decreases over time, it will be more difficult to have any impact